Audit Notes: Goldie’s AIG CDS, Smarter Readers, Adversarial Stance

James Keller has an interesting post over at RealClearMarkets on the Goldman Sachs/AIG controversy, which he says is “Likely Worse Than You Think.” Keller questions whether Goldman sold billions of dollars worth of credit-default protection it had bought on AIG after it knew the federal government wouldn’t let AIG default—but before that info was public.

When did Goldman sell its $2.5 billion of AIG protection? Goldman representatives have said that the protection was sold in the six months following the September 15, 2008 bailout loan. This is problematic. That is so because the details of the bailout were not released until March 15 of last year, when the famous AIG counterparty payments at last became public.

This suggests that Goldman sold its protection to counterparties that knew materially less about the actual risk of AIG than Goldman did. Remember that this bailout was specifically designed to avoid an AIG default, the event that forces Credit Default Swaps to be triggered. Goldman, in frequent conversations with Paulson and Geithner, knew that the government had just committed $85 billion to avoid exactly this outcome.

The rest of the world, purposely kept in the dark, saw the risk of an AIG failure as imminent…. This is why, immediately after the bailout was announced, the cost of protecting AIG risk skyrocketed. It rose to more than 40% of the amount hedged; meaning that Goldman, which had $2.5 billion in hedges, would have been sitting on over a $1 billion profit.

I would like to have seen a link pointing to where Goldman representatives said they sold those swaps in the six months after September 15. I can’t find it. Zero Hedge has more on Keller’s post here.

— Yves Smith has an interesting aside in a post on whether the Angelides Commission is structurally flawed:

I was on an NPR radio show later in the day about the hearing, and the listener questions were interesting. First, they were higher caliber, by a considerable margin, than I have had before on talk radio on economic matters, and I don’t think this is sample bias. It seems at least a portion of the public is interested, engaged, and somewhat down the learning curve. The second is they are angry and felt the AM hearings were too soft on the bank CEOs.

We agree the public is moving up the sophistication ladder. Is that because they’re paying closer attention to financial news, because the financial news industry is doing a better job, or because of the flourishing financial blogosphere and direct access to the experts themselves, like Smith herself or Simon Johnson and James Kwak or Barry Ritholtz, formerly limited to whatever the gatekeepers saw fit to print ? I’d say a combination of all three, but particularly the first and the last.

It’s imperative to employ a wider, and more historical, context than was displayed on the first day of hearings. That means questioning the very foundations of modern Wall Street and looking to which events over the past 20 years led the financial system to its current predicament…

Let’s also be less solicitous of those testifying. The group’s stance should be adversarial, forcing witnesses to answer tough questions and cough up the names of individuals who contributed to the crisis.

We and others have noticed the news pages moving a bit to the right in the last year or so, but it’s hardly in the same realm as the other four. Maybe the Tea Partiers are aiming for Holman Jenkins or Dan Henninger rather than the WSJ’s excellent straight-news reporters.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.

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